SURESHKUMAR PARASHMAL JAIN,MUMBAI vs. INCOME TAX OFFICER 3 (2), KALYAN

This appeal filed by the assessee is directed against the order dated 16.10.2025 passed by the learned Additional/Joint Commissioner of Income-tax (Appeals), Panaji [“learned CIT(A)”], under section 250 of the Income-tax Act, 1961 (“the Act”), arising from the assessment order dated 27.03.2015 passed by the Assessing Officer under section 143(3) of the Act for the assessment year 2012-13.

The assessee has raised the following grounds of appeal: “1. On the facts and circumstances of the case, the learned Commissioner of Income-tax has erred in upholding the action of the learned Assessing Officer in rejecting the books of account under section 145(3) of the Act.

Briefly stated, the assessee is an individual engaged in the retail business of gold and gold jewellery under the name and style of M/s P.G. Shanklesha. The assessee filed his return of income declaring total income of ₹11,52,320. During the assessment proceedings, the Assessing Officer examined the quantitative details of the opening stock, purchases, sales and closing stock of gold and gold jewellery.

The Assessing Officer recasted the trading account and valued the closing stock of 10,471.271 grams at ₹1,78,23,579, as against the value of ₹1,38,58,936 shown by the assessee in respect of 10,469.174 grams. On this basis, the Assessing Officer concluded that the assessee had suppressed the gross profit by ₹32,28,099. He rejected the book results under section 145(3) and added the said amount to the income of the assessee.

The Assessing Officer further noticed unsecured loans aggregating to ₹24,00,000 received from six persons. Cash of an amount corresponding to the loan was deposited in the respective bank accounts immediately before the issue of cheques to the assessee. The Assessing Officer was not satisfied with the creditworthiness of the creditors and the genuineness of the transactions and, accordingly, made an addition of ₹24,00,000 under section 68. The interest of ₹1,61,957 credited to these creditors was also disallowed. The Assessing Officer further disallowed interest of ₹42,700 under section 40(a)(ia) for non-deduction of tax at source.

The learned CIT(A) confirmed the rejection of the books and the addition of ₹32,28,099. He also confirmed the addition of ₹24,00,000 under section 68, observing that the assessee had failed to satisfactorily establish the creditworthiness of the creditors and the genuineness of the loans. The disallowances of interest of ₹1,61,957 and ₹42,700 were also confirmed.

Before us, the learned Authorised Representative submitted that the assessee was consistently valuing the stock at cost or market value, whichever was lower. The closing stock comprised jewellery purchased in earlier years as well as during the year under consideration. Therefore, the adoption of the average cost of the opening stock and current-year purchases for valuing the entire closing stock was incorrect. It was further submitted that any enhancement in the closing stock would correspondingly become the opening stock of the succeeding year and the entire exercise was, therefore, revenue neutral.

In respect of the unsecured loans, the learned Authorised Representative submitted that the creditors were assessed to tax and their returns of income, balance sheets, capital accounts, confirmations and bank statements were furnished. It was further submitted that the loans from Smt. Geetadevi H. Jain, Shri Hukumchand P. Jain (HUF), Smt. Rajnidevi Gautam Jain and Shri Santosh M. Jain were subsequently repaid through banking channels. Reliance was placed upon the decisions cited in the written submissions to contend that repayment of loans supported the genuineness of the transactions.

The learned Departmental Representative supported the orders of the authorities below. He submitted that the bank statements revealed cash deposits of exactly or substantially the same amounts immediately before the cheques were issued to the assessee. The creditors had returned only nominal income, mainly described as tuition or majuri income and interest income. The subsequent repayment of some of the loans did not establish the source of the cash deposited by the creditors or the genuineness of the original transactions.

We have considered the rival submissions and perused the material available on record. Grounds Nos. 1 to 3 relate to the rejection of the book results and the addition of ₹32,28,099 on account of alleged suppression of gross profit. The addition made by the Assessing Officer is essentially based upon his revaluation of the closing stock.

The assessee had shown closing stock of 10,469.174 grams of gold jewellery valued at ₹1,38,58,936. The Assessing Officer, on the other hand, adopted the closing quantity at 10,471.271 grams and valued it at ₹1,78,23,579 by applying an average rate derived from the opening stock and the purchases made during the year. The closing stock admittedly consisted of jewellery forming part of the opening stock as well as jewellery purchased or manufactured during the year. The cost of the jewellery forming part of the opening stock could not have been substituted by the average cost of purchases made during the current year without first identifying the quantity and cost of the respective items. The Assessing Officer has not demonstrated that any particular item of closing stock was valued below its actual cost or that the method consistently followed by the assessee was contrary to the accepted method of valuation. Merely applying an average rate to the entire quantity of closing stock cannot justify an addition to the trading results.

We also find merit in the contention of the assessee that the enhancement of the closing stock of the present year would correspondingly increase the opening stock of the succeeding year. The exercise undertaken by the Assessing Officer merely shifts the incidence of profit from one year to another and is substantially revenue neutral. In the absence of any finding that the assessee had made unaccounted sales, suppressed the physical quantity of stock or departed from its consistently followed method of valuation, the impugned addition cannot be sustained.

In these circumstances, the rejection of the books under section 145(3) is not justified. We, therefore, direct the Assessing Officer to delete the addition of ₹32,28,099. Grounds Nos. 1 to 3 are allowed.

Ground No. 4 relates to the addition of unsecured loans aggregating to ₹24,00,000 under section 68.

We find that the assessee furnished confirmations of the creditors, their returns of income, balance sheets, capital accounts and bank statements. The identity of all the creditors is not in dispute and the loans were received through banking channels. The documents placed on record also disclose the loans in the respective financial statements of the creditors. Thus, the assessee discharged the primary burden cast upon him under section 68 of the Act.

It is true that cash was deposited in the bank accounts of the creditors shortly before the cheques were issued to the assessee. This circumstance may give rise to a doubt and call for further enquiry. It cannot, however, by itself displace the documentary evidence furnished by the assessee. There is no finding that the cash deposited in the creditors' accounts emanated from the assessee, nor is there any material showing that the money received by cheque was routed back from the assessee. The material furnished by the assessee has not been shown to be false or fabricated.

The principle laid down by the Hon'ble Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540 (SC), that the surrounding circumstances may be examined to ascertain the reality of a transaction, is well settled. At the same time, surrounding circumstances must be considered along with the direct evidence available on record. Suspicion, howsoever strong, cannot take the place of evidence. In the present case, the confirmations, tax records, financial statements and bank statements of the creditors have not been rebutted by any contrary material.

We also find that the material furnished shows repayment of ₹4,00,000 to Smt. Geetadevi H. Jain on 07.11.2013, ₹4,00,000 to Hukumchand P. Jain (HUF) on 01.03.2012, ₹2,00,000 to Smt. Rajnidevi Gautam Jain on 08.11.2013 and ₹3,00,000 to Shri Santosh M. Jain on 26.11.2013 through banking channels. Although repayment is not conclusive by itself, it is a relevant circumstance which supports the assessee's explanation when read with the other evidence on record.

Considering the evidence in its entirety, we are of the view that the addition has been sustained merely on suspicion arising from the cash deposits in the creditors' bank accounts. The assessee having established the identity of the creditors and furnished evidence regarding their creditworthiness and the genuineness of the transactions, the addition of ₹24,00,000 under section 68 cannot be sustained. The Assessing Officer is directed to delete the same. Ground No. 4 is allowed.

Ground No. 5 relates to interest of ₹1,61,957 credited to the aforesaid loan accounts. Since we have held the loans to be genuine and directed deletion of the addition under section 68, the consequential disallowance of interest also cannot survive. The Assessing Officer is directed to delete the disallowance of ₹1,61,957. Ground No. 5 is allowed.

Ground No. 6 concerns the disallowance of interest of ₹42,700 under section 40(a)(ia). The assessee submitted that Form 15G had been obtained from the payee. In the interest of justice, this limited issue is restored to the file of the Assessing Officer to verify the declaration in Form 15G and decide the claim in accordance with law after granting a reasonable opportunity of being heard to the assessee. If a valid declaration was obtained within the prescribed time, no disallowance shall be made merely for any subsequent procedural default in furnishing it to the department. Ground No. 6 is allowed for statistical purposes.

In the result, the appeal filed by the assessee is allowed.